The Dangers of SPAC Warrants Explained - Stock Market Simplified

Investing in SPAC warrants is a great way to potentially save money on the cost of acquiring common shares of a company, but there are risks that you should understand. We cover those risks in this video.

SPAC's are great.
Warrants are a great way to save a lot of money on common shares of a company.
So SPACs + warrants are absolutely great right?
Well, no.
I've explained how SPAC's work and how warrants work in separate videos, so if you need a primer on these instruments, the links to these videos are in the description.
While buying a SPAC's warrants can get you an amazing deal on its common shares, there are dangers to watch out for.
Two to be exact. We will cover both in this video and discuss how to manage their associated risks.
#1: The warrants can be called due by the company after the merger is complete and the stock trades above a certain price for a certain number of consecutive days.
This means the company can force you to exercise your warrants or lose them.
This happened with Nikola Motors.
[TODO] the details
How to manage this risk:
Watch the stock closely and consider taking one of three actions:
Make sure you have enough money to exercise the number of warrants you want to in case the company achieves the right to call their warrants due.
Exercise the warrants as soon as the numbers make sense, before they are called due.
Buy warrants with the goal of flipping them once they reach a certain price before they are called.
If you can't afford to exercise all of your warrants, sell your remaining warrants before they are called.
#2: The merger does not go through, your warrants become worthless.
Common shares of a SPAC are special and safer than a normal company's stock because there is a floor to how low the stock price can go.
If the merger doesn't go through and you own common shares of the SPAC, you are entitled to redeem your portion of the funds raised during the SPAC's IPO and placed in the trust fund.
We've covered this in great detail in our video on why SPACs are a great opportunities for retail investors, so go check that out for more details.
Per shareholder rights, common shares of a SPAC can't go to $0 if the merger fails.
However, that is not true for warrants. Why?
Because warrant holders are not shareholders, so they don't benefit from shareholder rights and protections.
Warrant holders do not participate in redemption of funds from the SPAC's trust fund.
Furthermore, your warrants are only valuable if they can be converted to common shares of the merged company.
All of that means that if the merger does not complete, your warrants become worthless and you lose all of your investment in your warrants.
How to manage this risk
Only invest in warrants of SPAC's you strongly believe in and are willing to watch closely to ensure their merger complete successfully.
Don't invest in warrants of a SPAC if you are afraid there's a non-insignificant chance of the merger failing.
Invest in the warrants and sell them to another investor if you start to suspect that the merger will fail. Yes, this is a zero-sum approach. This is the bigger fool theory in practice.

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